Pension deficits on the rise again – have you thought about ABCs?
February 25, 2015
The total deficit of schemes in the Pension Protection Fund 7800 Index has surged by nearly £322bn over the past 12 months.Low interest rates and related government bond returns, at a time in 2015 when many businesses are agreeing their scheme funding valuation, could result in increasing demands on cash from pension scheme trustees. The pension scheme trustees have a fiduciary duty to protect their scheme members. They need to see sufficient cash coming in to repair the deficit but balance this with the cash requirement for business growth.
Employers, trustees (and advisors) may all have different views if and when interest rates may return but they all share a common interest to manage the impact of the low interest rates. Their concern is the right balance between what is required now and longer term to protect against an ever increasing risk of trapped surpluses in pension schemes over the next 10-15 years.
The use of Asset Backed Contributions (ABCs) is being revisited by many businesses as solutions which avoid both large up-front cash contributions and the risk of trapped surpluses. From Reservoir Trusts to the partnership funding structures these solutions all have the same fundamental characteristics:
· Either no cash funding or cash diverted to a vehicle outside the pension scheme
· Lengthened recovery periods
· Reduced risk of trapped surpluses
· Option to be treated as accounting or scheme asset
Non-cash funding will become increasingly common as the year progresses as a modern and practical way to secure pension funding whilst preserving cash to grown businesses.
Deborah Cane is a senior manager in our Pensions Tax team. If you’d like to find out more about the asset backed contributions, you can contact her on +44 (0) 20 7212 5187 or by email at [email protected].